The BJP’s 4-0 win over
congress in the recent assembly election has kept stock market at fire. The
northward journey continues and Nifty has hit all time high mark. There is
strong belief in the market that Mr. NarendraModi will become next Prime Minister
of India after general elections in 2014 and after that GDPgrowth again will
touch 8% mark.But, we should know that still there are six months to go before
next general election and anything can happen in this period. We also know that
how the elections are fought in India.
The rise in stock
market without fundamental support puts a big question mark on the current
rally. Stock market is believed to be the mirror of the economy of the country
and any up or down in the economy should reflect in the stock market. GDP grew
by 4.8% for the 2nd quarter of 2013-14 compared to 4.4% in 1st
quarter which is well below 8% mark when market first time touched it’s all
time high. Its hard fact that India’s GDP is likely to be around 5% in the
current fiscal which is not at all a good number for the economy. When Sensex
touched 21000 first timebefore 2008 global crisis, our GDP growth was around
8%. Today it is 3% down at 5% and still we are at the higher levelon both
Sensex and Nifty as compared to 2008.
How one should view these
developmentswhen GDP number is not encouraging and the market is still at all-time
high level. It’s putting a big question mark against a well known saying
“Market is reflectionof the economy of the country”.I strongly feel that GDP
numbers do not support the current rally. It is true that market discounts
future.It is believed that worst is over and we will soon see economic revival
post elections. But, the true story is 2014 election results are not easy to predict
and depend on many possibilities. Assuming NDA will get the majority is too
early to believe.
On economic front, it
is true that rupee has stabilised against the dollar and crude oil is also
under pressure which is good for the Indian economy as it will reduce current
account deficit. Iran deal if all goes well, will also be advantageous for us.
But, the real problem is inflation. In the scenario where WPI is at 7% and CPI
is at 10%, interest rates are unlikely to come down. It is well-known fact that
higher interest rate is not good for the corporate world as their earning is
largely affected by further hike in the repo rate. We have to wait till next
RBI review meet and see what RBI will donext. Most of the experts feel that RBI
won’t increase repo rate as the crude price is under pressure and also rupee
has stabilised.
The future course of
the market will be decided by the three major things and any disappointment on
any of the issue will reverse the scenario. The first is the U.S. tapering. We all
know that our market is mostly FII driven and the short-term money which comes
for investment is not good for overall long-term stability of the market.At
present rupee has stabilised against the dollar but major movement can’t be
ruled out once the tapering starts in the U.S. Secondly, the inflation numbers
are also a major concern and may force RBI to increase the repo-rate further if
rupee weakens further.
Third and major is
general election next year i.e. mostly within six months. Looking at the present
political scenario, definitely BJP has an edge at this point, but will BJP will
get clear majority. The answer to this question is not certain and also if BJP
comes to power, economic recovery will not happen overnight. The answer to this
is also depends on many factors which are difficult to predict at this
juncture. The real test of BJP is in U.P., Bihar, four states of southern India
and seven states of North East where it has to work very hard to get the
numbers. The performance of AAP is also commendable and their future course of
action is also important to watch. In the event of hung parliament, which also
a possibility, our economy will further deteriorate, as the new government will
not be in a position to take bold steps in the interest of economy.
There is no doubt that
high inflation numbers, the US tapering and expectation on new government will
drive the market for next six months. So it’s good time to take a cautious
stand while investing in stock marketparticularly when it is at all-time high
level. Investing in equity through mutual fund via monthly SIP makes a lot of
sense but it is also advisable to review and rebalance the portfolio as per
asset allocation periodically. Next six months are going to be crucial for the stock
market.
This article first published in moneycontrol.com on 11th December'2013. below is the link
